State's income tax system aggravates economic shortfall.

CALIFORNIA has struggled with poor economic growth and extreme variability of state income-tax revenue. Policymakers seeking to fix these problems should look at the high degree of progressivity in the state income tax.

By reforming the tax to make it less progressive--specifically, by lowering and compressing tax rates--California could enjoy faster economic growth and more stable tax revenue over the business cycle.

Individual income taxes in California account for almost 42 percent of state tax revenue, a full 6 percent higher than the national average of 36 percent. Thus, California relies far more heavily on the individual income tax as a revenue source than do most other states. California's income tax has six tax brackets with marginal rates ranging from one percent up to 9.3 percent, depending upon the taxpayer's level of taxable income.

In 2002, California residents paid $941.07 in state income taxes for every man, woman, and child, a figure more than 30 percent higher than the U.S. average of $642.93. In 2001, the top 5 percent of California income-tax fliers paid 47 percent of the state income tax, while the bottom 33 percent paid just 5.4 percent of the total tax.

Our new study, published by the California-based Pacific Research Institute, uses four measures of progressivity. On all four, California ranks among the top 20 states. The degree to which California differs from neighboring states such as Oregon, Nevada, and Arizona is striking.

The temptation is very strong for California policymakers to hike taxes even further in order to play Robin Hood. The problem is, the rich can simply pack up and move elsewhere. Nevada, which has no state income tax, is an enticing destination, and California's workers' compensation woes provide added motivation to move.

Second, the more progressive a state's income tax is, the greater will be the variability of the state's income-tax revenues over the business cycle.

To reduce the progressivity of the California income tax, policymakers can compress the marginal rate structure by reducing the number of brackets or reducing the spread between the top and bottom rates. Policymakers can decrease the level of the standard deductions and personal exemptions. Another option is to allow Californians to deduct federal income tax liability from their California taxable income.

Legislators and taxpayers alike should recognize that the more "progressive" the tax, the more burdensome and punitive it will be.

Sobel is an associate professor of economics at West Virginia University. Lawson is a professor of economics and George H. Moor Chair at Capital University. Hall is director of research at the Buckeye Institute for Public Policy Solutions in Columbus, Ohio.